Should I sell my stock & bonds? I’ve lost $7,000 lost in 10 years. That’s half the amount I invested. Should I buy gold with the $7,000?

How would you respond? I told this person I have no idea. Here’s why.

I manage money with mutual funds and exchange traded funds and I try to use investment strategies that make sense. I don’t make any decision based on my predictions about the future. I have an investment strategy and I stick to it. It’s not perfect but it takes the emotion out of the equation.

“Should I sell my stock?” is a question that can’t be answered unless you first answer the question, “Why did you buy the stock?” You see, I believe that you should only invest your money using a strategy. Your strategy isn’t going to work perfectly, but you should never invest your money based on your gut feeling. Your strategy could be far different than mine and that’s OK. But you must have a strategy that guides your investment decisions.

Those are my general feelings. Now…let’s talk about this particular investor. Specifically, this investor seems to be a speculator and acting out of desperation. My guess is she wants to plunk her money into gold in order to quickly make up for the losses she suffered. That’s now how to make money in gold if you ask me. Here’s a tip.

The market doesn’t care about the money you lost.

If you try to speculate in order to make up for the losses you suffered as a result of your speculation, don’t expect a positive outcome.

So my best advice is for this investor to take a time-out. Get clear on her strategy. Then, and only then, make investment decisions if, and only if, they are consistent with your long-term strategy.

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I like your point that the market doesn’t care how much money she lost. I would also stress the importance of the second decision she will need to make – what to do after she sells. What if this was 2009 and the stock she is referring to started increasing and then increased well above her original investment price? Would she want to buy back then (especially if gold didn’t perform as well)? Deciding what to do once you’ve sold a security can be harder than the original decision you made to sell.

One should approach investing in a company’s stock no differently that investing in rental property. A person should only buy optionable stock and only after doing research to confirm sound company fundamentals. The motivation for buying the stock, in my opinion, needs to be to produce an income stream by “renting out” the stock each month via covered call sales – verses the speculative approach most investors take in buying a stock and hoping and praying it goes up. In this case, I believe the subject of the above article should only sell her stock (at a loss) if it is not optionable. Otherwise, she should keep the stock and begin producing an income stream by selling covered calls against the stock each month. Afterall, you wouldn’t buy a piece of real estate to rent out and then think you all of a sudden have to sell the property, one month, just because the value of the property has declined to less than you paid for it – no, you would continue collecting rent on the property, realizing that like stocks, the value of real estate goes up and down.

Also can I add… never under any circumstances listen to anyone on the internet! Do your own research. Erik above me said not to buy gold since it was at an all time high. Back when he said it gold was at $1100 an ounce. Now its around $1850. The person asking the question could have put all of his remaining $7k into gold, sat for a year and now be up $5000, almost recovering all of his money. Im sure gold isnt at its high point yet. Im sure silver would have done well too. Silver goes into all cellphones, smartphones, laptops, etc. And with the advent of the ipad and other similar devices breaking records… silver wont be going down in price any time soon either.

For me its diversification and research. Gold, silver, and other upward trending stocks.

Several things: First, Neal you’re right about having a strategy. If this investor is clueless, it’s time to use this ‘loss’ (paper for now) as a motivation to learn, strategize, and follow-thru. Second, I would not take the strong position to either ‘never sell at a loss’ or ‘buy more’. If the company is going down the toilet (i.e. typewriter manufacturer) then by all means gets out before you lose ALL $7000. But if it’s just part of the general malaise affecting the economy, ride it out. I would not put more into it at this time personally. This person does not sound like he/she should be targeting single stock investments since they make him/her into a nervous nelly when the market drops. Mutual funds — or anything more diversified — at least minimize the bit, usually (except for 2008…yuck!). Third, don’t invest in gold now. It’s at an historically high price. Wait until it gets cheap, then consider it as a small portion of an overall strategy. Gold is not a part of my strategy, and this is why: It appears lately that gold has been bid up by fear of inflation. If we see hyper inflation, gold won’t save me. I can’t eat it, can’t living in it, can’t wear it, and it’s a pretty bad way to conduct commerce. Most people do not have the expertise to evaluate how much gold is worth, and in a hyper-inflating market the value will be changing constantly. At some point you have to convert it into cash (at which time you lose your hedge against inflation) or chop it into small pieces. Then you have to find someone willing to trade for it. Why would I take gold in exchange for 20 gallons of gasoline? or a gallon of milk? or a shot gun? THOSE are the items you’ll need if hyperinflation runs wild. Plus, even if you can find someone who will actually trade, will they or you know how many gallons of milk your gold is worth? Who will evaluate it’s authenticity, weight, purity? Simply put, gold can be part of a strategy, but I see it as a small portion for people who have money to lose and who bet on it short term. Your investor doesn’t sound like the type of person who would benefit.

Selling at a loss can be beneficial in some circumstances. There are tax advantages like being able to offset gains in other parts of a portfolio. So the blanket “never sell when you’re down” is a slippery slope. I agree with everyone that hit points on a strategy of plan. Going in if you set yourself up with parameters or a trading system then stick with it..it’s just like a casino, when you go in with a predetermined amount that you are comfortable losing and that’s it then the casino won’t take your shirt..and you won’t chase. Buying and selling mean very different things to different people which is why having a plan and evaluating why you were in the position in the first place is important…not to mention no one like cost basis headaches lol.

Thats just the thing. NO ONE knows what the market will do. Not these talking heads on CNBC, not Jim Paulson..not you or I. So I believe your advice was on point. I’m going to add something that I’ve learned along the way and that has benefited me tremendously. Never sell a stock that is sitting at a loss. Thats my number 1 rule. You can sell when you have major gains. You can sell if you’re just treading water and you’re essentially flat with your profit. But normally if you are selling something for a loss, its generally during the absolute WORST time. Its just the way human emotion works in a panic(which like you said should be taken out of the equation) so by ignoring current market issues, many times you will sidestep short term pricing issues.

After all, you should only be making long term investments in companies that you believe in and you should be prepared to have that money swallowed up by the market if things don’t go right. If you’re saying that by such and such time, the price should be ____, then you’re essentially timing the market and that is rarely ever a good thing. Once again, only use enough money in each security that you are prepared to lose in whole. By doing so, you already prepared yourself for the game beforehand and you know to keep enough money on the sidelines if you have a change of heart and want to invest in something else. Like you said, dont try and sell for a loss, then use that money to chase the next hottest thing to make up for that loss. That more often than not, turns out disastrous.

What advice would I give? It would not be much different from the advice you gave. I might add a warning not to look for this one investment that makes you rich quickly. It should not be hard to follow that advices since her “strategy” probably has not worked our for her anyway.

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Who is Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim. Read More »

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